Empire Company Limited

Empire Company Limited (TSX: EMP.A) is a Canadian company which is engaged in the business of food retailing and related real estate. The Company's segments include Food Retailing, and Investments and Other Operations.

Key highlights 

• Focusing on improving margins:The Company launched Project Horizon, three-year strategy regarding growth plan, focused on core business expansion and e-commerce acceleration. The Company targets an incremental CAD 500 million in annualized EBITDA and an improvement in an EBITDA margin by 100 basis points by fiscal 2023 through growing market share along with building on its cost and margin discipline. 

• Rise in Free cash flows: The Company increased itsFree cash flow in Q2 2021 to CAD 75.2 million, primarily due to a decrease in capital investments and the timing of rent payments due to the reporting quarter end date, partially offset by a decline in proceeds on disposal of assets. For fiscal 2021, capital spending is expected to be between CAD 650-675 million, with approximately half of this investment allocated to renovations and new stores openings.

Source: Company 

• Repurchasing of shares under "NCIB": During Q2 2021, the Company purchased for cancellation 55,500 Class A shares at an average price of CAD 37.47 per share for a total consideration of CAD 2.1 million. Subsequent to this, as of December 8, 2020, the Company has purchased 810,817 Class A shares for CAD 29.4 million. As the management is busy buying shares under "NCIB" itself, it reflects the group's optimism and confidence in the business and its strong roots. 

• Robust Liquidity: The Company believes its cash and cash equivalents of CAD 756 and access to approximately CAD 756 million in unutilized, aggregate credit facilities that do not expire until fiscal 2023, along cash generated from operating activities would enable them to fund future capital investments, working capital and ongoing business requirements. 

Financial overview of Q2 2021

Source: Company 

• In Q2 2021, the company reported CAD 6.98 billion of sales, increased by 8.4% against CAD 6.43 billion in the previous corresponding period. The increase in revenue was primarily due to market share gains in the Food retailing segment and the expansion of FreshCo in Western Canada.
• Operating income increased by 7% to CAD 306.5 million in Q2 2021, compared to CAD 286.4 million in Q2 2020. The rise in operating income was mainly due to improved earnings from the Food retailing segment because of higher sales driven by the impact of COVID-19 and higher margins, partially offset by higher selling and administrative expenses.
• The company's net earnings in Q2 2021 stood at CAD 176.8 million, compared to CAD 160.3 million in the previous corresponding period. An increase in net income was primarily due to the above-stated reasons, partially offset by higher income tax. 

Risks associated with investment

The COVID-19 pandemic clouds the company's near-term outlook. While the Company foresees revenue to remain above average through the duration of COVID-19 based on its role as an essential service offering but lower consumer spending, coupled with a decline in the traffic, might act as a dragger, which would dampen the overall performance of the Company. 

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

In Q2 FY21, the company came out with healthy performance, where same-store sales excluding fuel increased by 8.7% and clocked free cash flows of CAD 75.2 million. The company also maintains a healthy balance sheet with CAD 756 million in cash and cash equivalents along with access to approximately CAD 756 million in unutilized, aggregate credit facilities. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 35.63 on January 20, 2021.

Source: Refinitiv (Thomson Reuters)

North West Company Inc.

North West Company Inc. (TSX: NWC) Inc is a Canada-based company, which operates in retail business in underserved rural communities and urban neighborhoods. The company provides food, family apparel, housewares, appliances, and outdoor products, with food products accounting for the majority of the company's revenue. 

Key Highlights:

• AN Income Play: NWC has reported a consistent dividend payout over the years, backed by stable cash flows. During 9MFY20, the company paid a total dividend of CAD 49.748 million, higher than CAD 48.262 million, a year ago. At the last closing price, the stock of NWC generates an annualized dividend yield of ~4.525%, higher than the yield of TSX Composite of ~3.32%.

Ten years Dividend history (Source: Refinitiv, Thomson Reuters)

• Lower debt-component: The group has successfully lowered its debt component on a sequential basis, which is a key positive. At the end of Q3FY20, the total debt of the company stands at CAD 460.3 million, lower than CAD 493.4 million in Q2FY20. The decline in total debt would result in lower finance costs, which would support the company’s bottom-line in the coming days.

• Better than Industry margins: The group reported a strong profitability margin and outscored the industry median. Gross margin and operating margin in Q3FY20 stood at 33.5% and 9.6%, respectively, higher than the industry median of 22.5% and 4.1%, respectively. Also, in Q3FY20, the company’s net margin stood at 6.5%, higher than the industry median of 2.2%, which is encouraging.

Q3FY20 Financial Highlights:

• NWC announced its quarterly results, wherein the group posted sales of CAD 552.975 million, higher than CAD 519.521 million in the previous corresponding period (pcp).
• Gross profit stood higher at CAD 185.064 million, as compared to CAD 169.307 million in pcp, thanks to a higher income, partially offset by a higher cost of sales (CAD 367.911 million versus CAD 350.214 million in Q3FY19).
• Earnings from operations stood at CAD 52.934 million, significantly higher than CAD 36.99 million in pcp. The increase was supported by higher gross profit and a slightly lower selling, operating and administrative costs (CAD 132.130 million versus CAD 132.317 million in pcp).
• Net earnings surged to CAD 35.914 million, from CAD 24.838 million in Q3FY19.
• The group reported a cash balance of CAD 59.712 million, while total assets were recorded at CAD 1,212.470 million.

 Source: Company Reports

Risks: The company’s performance might be impacted by the further outbreak of COVID-19 and change in customer preferences. Moreover, the management highlighted that due to the sale of Giant Tiger stores, the group might witness lower sales in the Q4FY20, as compared to Q4FY19.

Valuation Methodology (Illustrative): Price to Earnings-based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

Despite the ongoing slowdown, the company reported higher cash from operations of CAD 232.058 million during 9MFY20, as compared to CAD 112.797 million, a year ago, which is impressive. The stock of NWC appreciated ~31% and ~12% in the last nine months and one year, respectively. Moreover, the products offered by NWC are falls in essential services, and the ongoing shift in consumer spending remained in favor of the Company's product and service, which is a key positive. Due to the exit of its Giant Tiger Transaction, the group expects a lower sale on an annualized basis, which reflects approximately CAD 200 million loss of wholesale food sales. However, the above transaction is expected to have a positive impact on earnings from operations of ~CAD 10 million. We have valued the stock using P/E based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Roots Corp, Leon's Furniture Ltd and Intertape Polymer Group Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 31.82 on January 20, 2021.

NWC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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